Is the Optimal Labor Income Tax Progressive in a Unionized Economy?*

Abstract

This paper concerns optimal nonlinear labor income taxation in an economy with union wage setting and endogenous hours of work. The purpose is to study the determinants of tax progression. We show that the optimal degree of progression of the labor income tax depends on the extent to which the government can influence the wage rate via tax policy as well as on its ability to redistribute income across individuals. In addition, the argument for progressive labor income taxation depends on whether hours of work are chosen by the employed themselves or the union.

Environmental Policy, Efficient Taxation and Unemployment

“…Note that the outcome of wage formation, as represented by equations (9) and (10), need not necessarily be derived from a seniority type of model; other union objectives and decision variables are also possible. The critical aspect is, instead, that the relationship between the tax system, the wage rate and the employment does not enable the government to implement the first best; see Aronsson and Sjögren (2004a). 8.…”

“…There are also studies focusing more explicitly on the determinants of tax progression in economies with imperfect competition in the labor market; e.g. Fuest and Huber (1997) and Aronsson and Sjögren (2004a).…”

Optimal income taxation and social norms in the labor market

“…Therefore, if the code is sufficiently strong, it tends to survive even if those who obey it may incline substantial intrinsic utility losses; see also Bernheim (1994). 7 See, e.g., Fuest and Huber (1997) and Aronsson and Sjögren (2004). description of the government's decision-problem and the results in terms of optimal income taxation. Finally, the results are summarized and discussed in Sect.…”

Optimal taxation and redistribution in an OLG model with unemployment

“…They show how and why employment-related motives behind the public policy, which are due to the appearance of imperfect competition in the labor market, may modify the use of income taxation, commodity taxation, and public good provision. Another part of this literature deals more explicitly with labor income tax progression; for instance, by considering the relationship between, on the one hand, the optimal degree of tax progression and, on the other the structure of wage bargaining and/or the incentives underlying the choice of work hours (see Fuest and Huber 1997and Aronsson and Sjögren 2004a, 2004b. 2 Earlier studies on optimal taxation and redistribution in dynamic models include, e.g., Ordover and Phelps (1979), Brett (1997), Boadway et al (2000), and Pirttilä and Tuomala (2001).…”